Australian Government, Australian Government Actuary

Appendicies

Appendix 1: ROC support payments

A.1.1 ROC support payments are paid to Medicare Australia in the form of an annual lump sum imposed as a tax on each MII from 1 July 2004. The lump sum is intended to cover the cost of claims and the MIIs’ administration and implementation costs.

A.1.2 The amount of support payments is calculated as a percentage of premium income received from contributing practitioners. The calculation rules are set out in the MI ROCSPA and regulations. The tax imposed on each MII is the applicable percentage of the insurer’s premium income (section 6) for the applicable contribution year ending on 30 June or an alternative date specified in the regulations (section 5).

A.1.3 All MIIs except for AMIL were required to remit their first ROC support payments on 30 June 2005. Since AMIL’s policy year is a calendar year, it was not required to remit ROC support payments until 31 December 2005.

A.1.4 Under section 7, a MII’s premium income for the purpose is the sum of all of the premiums paid to the insurer for medical indemnity cover provided for medical practitioners, reduced according to the formula:

Premium income equals

Net premium – Net premium × Applicable percentage ÷ (1 + Applicable percentage)

A.1.5 Net premium is calculated according to section 7 as follows:

  • sum of all premiums paid to the insurer during the operation of the Scheme for medical indemnity cover provided for medical practitioners (including subsidy payments made to the insurer on behalf of medical practitioners to assist with the cost of purchasing medical indemnity cover under the Medical Indemnity Premium Support Scheme, section 43(1) Medical Indemnity Act) (subsection (1));
  • minus the amount of GST payable (subsection (2)(a)) and the amount of stamp duty payable (subsection (2)(b)) in relation to the premiums;
  • plus/minus other payments specified in the regulations.

A.1.6 The applicable percentage is specified in the regulations as 8.5 per cent for all insurers except AMIL which has a higher percentage of 9.5625 per cent. The effect of this is that the ROC support payment is currently calculated as:

  • Net premium × 8.5 per cent ÷ 1.085 for all MIIs except AMIL, and
  • Net premium × 9.5625 per cent ÷ 1.095625 for AMIL.

 

Appendix 2: Eligible practitioners and Run-Off Cover Scheme contracts

Eligible persons

A.2.1 Eligible persons are those who fit one or more of the following eligibility categories at the time the claim (or medical incident) is first notified to the MII or MDO (section 34ZB(2) of the Medical Indemnity Act and Medical Indemnity Regulations 2003 regulation 12):

  • A doctor 65 years or older who has permanently retired from paid medical practice.
  • A doctor who has not engaged in paid medical practice during the preceding three years. (Note: unlike other categories, eligibility does not occur immediately upon ceasing practice).
  • A legal representative of a deceased medical practitioner (provided that a claim can be made against the deceased’s estate).
  • A doctor who has ceased paid medical practice due to permanent disability.
  • A doctor who has ceased paid medical practice because of maternity.
  • An overseas trained doctor who worked under a 422 or 457 visa, has permanently ceased medical practice in Australia and does not reside in Australia.

Provision and notification of compulsory run-off cover

A.2.2 The practitioner’s last medical indemnity insurer is required to provide run-off cover to an eligible practitioner under section 26A of the PSPS Act.

A.2.3 The compulsory run-off cover must encompass the same nature and range of incidents as the last medical indemnity cover held by the eligible practitioner (subsection 26A(4)(b)).

A.2.4 Section 26D compels MIIs to notify eligible practitioners of:

  1. the nature and range of incidents encompassed by the compulsory run-off cover; and
  2. the terms and conditions on which it is provided.

A.2.5 The compulsory run-off cover is taken to be a contract of insurance between the MII and the eligible practitioner for the purposes of the PSPS Act (section 26E).

 

Appendix 3: Run-Off Cover Scheme claims

A.3.1 The legislation defines claims broadly. Claims need not involve legal proceedings. Claims may include civil claims for negligence, administrative proceedings, disciplinary proceedings (including those performed by a professional body) and inquiries or investigations into conduct (subsection 4(1) of the Medical Indemnity Act).

A.3.2 A ROC claim is payable to an MII or MDO under section 34ZC in relation to a claim eligible under subsection 34ZB(1) if:

  • it was first notified to the MII or MDO on or after 1 July 2004;
  • it relates to a person eligible under subsection 34ZB(2) (see Appendix 2);7
  • it relates to incident(s) occurring in connection with the person’s practice as a medical practitioner (see paragraph 34ZB(1)(b));
  • either the person is indemnified for the claim by an MII in accordance with section 26A of the PSPS Act, or the person is indemnified under incident-occurring based cover provided by an MDO (paragraph 34ZB(1)(e));8 and
  • the claim would be paid in the ordinary course of the MII’s or MDO’s business.

A.3.3 Where these criteria are met, the Commonwealth is liable to pay run-off cover indemnities regardless of whether the MII or MDO has sought private reinsurance (section 34ZF).

A.3.4 Applications for ROC indemnity payments must be made to Medicare Australia (section 36 of the Medical Indemnity Act). They are paid by the CEO of Medicare Australia before the end of the month that immediately follows the month in which the MII applies for the indemnity (section 37).

A.3.5 The Run-Off Cover Scheme operates after the High Cost Claims Scheme (HCCS). Thus, part of the cost of eligible large claims is first met by the HCCS with the rest being picked up by the Run-Off Cover Scheme (subsection 34ZH(2)). The HCCS meets 50 per cent of total costs incurred in relation to an eligible ROC claim exceeding $300,000.

 

Appendix 4: Methodology, assumptions and uncertainty

Information provided by the MIIs

A.4.1 Information was provided by the MIIs and MDOs and their actuaries in relation to projected future payments for:

  • ROC claims notified as at 30 June 2006; and
  • ROC incurred-but-not-reported (IBNR) claims as at 30 June 2005.9

A.4.2 Table 8 below summarises the estimated accrued Scheme liabilities as at 30 June 2006. The Scheme liabilities are divided into those attributable to claims notified as at 30 June 2006 and those attributable to IBNR claims as at 30 June 2006.

Table 8: Run-Off Cover Scheme liabilities related to medical incidents prior to 30 June 2006

Liabilities in relation to claims notified as at 30 June 2006 $3.5 million
Liabilities in relation to IBNR claims as at 30 June 2006 $42.1 million
Total Scheme liabilities $45.6 million

A.4.3 The components of the Scheme liabilities in relation to prior medical incidents as at 30 June 2006 are reconciled to those as at 30 June 2005 in Table 9 below.

Table 9: Reconciliation of Run-Off Cover Scheme liability components with previous report

  ($’m)
Paid by MIIs but not yet recovered from Medicare Australia as at 30/6/2005 0.0 
ROC indemnity payments (0.0)
New paid but not yet recovered 0.7
Paid by MIIs but not yet recovered from Medicare Australia as at 30/6/2006 0.7
   
Incurred but not notified to MIIs (IBNR) as at 30/6/2005 28.9
Change interest rate (1.7)
Expected notifications 05-06 (4.7)
Notional interest 1.3
IBNR at 30/6/2005 which remains IBNR at 30/6/2006 23.8
   
Notified to MIIs as at 30/6/2005 1.5
Paid but not yet recovered (0.7)
Change in actuarial assumptions 0.4
New notified (from IBNR at 30/6/2005 and 2005-06 accrual) 1.4
Notified to MIIs as at 30/6/2006 2.6
   
2005-06 accrual estimated in previous report 14.6
Expected notifications 2005-06 (0.1)
Change interest rate, correct technical error, modify payment pattern 0.2
Notional interest 0.9
2005-06 accrual which remains IBNR as at 30/6/2006 15.6
   
Base liability estimate at 30/6/2006 42.7 
Claims handling expenses 2.9
Total as at 30 June 2006 45.6

A.4.4 For the purpose of this report, the 30 June 2006 liability has been subjectively apportioned in the following way to give broad consistency with the results of our own model.

  • $8 million in respect of practitioners eligible for the Scheme as at 1 July 2004.
  • $38 million in respect of practitioners who were not eligible for the Scheme as at 1 July 2004.

A.4.5 The actual value of the Government obligation will not be known for a number of years but estimates will become more reliable with time.

A.4.6 Projected payments in relation to medical incidents occurring before 30 June 2005 were aggregated directly from estimates provided by actuaries of the MIIs.

Description of the model used to project the accrual of new Run-Off Cover Scheme liabilities after 30 June 2006

A.4.7 The approach involved projecting the expected future ROC indemnity payments for each doctor who was practising as at 30 June 2006. Projection of indemnity payments entailed the projection of:

  • incidents which will result in a claim;
  • the delay involved in notification of claims;
  • the cost of claims after allowing for the HCCS;
  • the likelihood of eligibility for the Scheme at the time a claim is notified; and
  • the delay involved in the payment of notified claims.

ROC claims

Components of claim cost

A.4.8 For the purposes of the model, a ROC claim includes any eligible claim notified and finalised at direct cost to the MII. Claim costs include all costs which are directly attributable to the claim. Indirect claims handling expenses (CHE) are dealt with separately.

A.4.9 Directly attributable claim costs include damages, plaintiff legal costs to the extent that they are awarded, and defence costs to the extent that they are directly attributable to the claim.

A.4.10 The Scheme pays 5 per cent of the direct cost of each eligible claim to cover CHE. Where an eligible claim is partly covered by the HCCS, the allowance for CHE paid under the Scheme is 5 per cent of the total claim cost, including the portion covered by the HCCS.

Assumptions

A.4.11 Claim experience has emerged in 2005-06 which was lighter than that we expected based on the assumptions in our 2004-05 report. However, a short period of emerging experience shouldn’t necessarily be relied on as a guarantee that underlying assumptions are inappropriate for such a long-tail and uncertain line of insurance as medical indemnity. This is especially true in relation to the Scheme, due, for example, to the following factors:

  • Run-Off Cover Scheme claims are very long-tail and model projections are particularly sensitive to assumptions.
  • The Scheme is relatively immature.
  • Systems to facilitate timely and accurate data transfer are still being developed.
  • The Scheme commenced immediately after tort reforms were implemented, with the tort reforms being preceded by a period of abnormally high claim rates (‘claim spike’).

A.4.12 We were reluctant to change the assumptions underlying our model due to these factors.

A.4.13 The main claim and demographic assumptions underlying the long-term Scheme projections have been left largely unchanged for the purpose of this review.

Claim frequency assumptions

A.4.14 Claim frequency and claim size assumptions were made in light of information provided by the actuaries of the MIIs.

A.4.15 The overall claim frequency was assumed to be 5 per cent. That is, on average each ‘at-risk’ doctor was assumed to have a 5 per cent chance of being involved in a medical incident in the next year which will result in a future medical indemnity claim. Individual claim frequencies were adjusted based on premium as discussed below.

A.4.16 Practitioners with standard medical indemnity premiums of less than $1,500 were excluded from the analysis in order to ensure that only genuine ‘at-risk’ doctors were the focus of the investigation. The excluded group contained interns, trainees and hospital indemnified doctors in some of the data provided by the MIIs. In all over 56,000 practising doctors have some standard premium. After excluding those doctors with premiums of less than $1,500 we were left with 33,996 ‘at-risk’ doctors and we have set our claim frequency assumption at 5 per cent to be consistent with this.

Adjustment to individual claim frequencies based on premium

A.4.17 The likelihood of future notifications of ROC claims was projected according to the assumed ‘riskiness’ of each individual practitioner. The risk of medical indemnity claims posed by each practitioner was determined based on risk categorisation. Practitioners were categorised according to specialisation, age, gender and MII.

A.4.18 The average premium for each risk group was used as a proxy for the risk of medical indemnity claims. The claim frequency for each group was multiplied by the ratio of the premium for the group to the premium of the entire cohort of ‘at-risk’ doctors.

A.4.19 Although insurance premiums are broadly determined in line with claim risk, the premium of a group is at best an imprecise proxy for risk. For example, market and financial considerations affect premiums charged. However, given the data available, relative premiums have been assumed to be a reasonable means of categorising practitioners according to their risk of medical indemnity claims for the purposes of this model.

A.4.20 Insurance premiums tend to diminish for practitioners towards retirement age. This supports the suggestion that doctors tend to wind down their practice hours and possibly perform fewer risky medical procedures (for example, surgery) as they approach retirement. The possible reduction in risk towards retirement is apparent from the pattern of relative premiums for ‘at-risk’ male doctors shown in Figure 6 below. The pattern is less obvious for females, given the low proportion of females in the oldest cohorts.

Figure 6: Relative standard premiums by age for male doctors

Figure 6 (line graph): Relative standard premiums by age for male doctors

Note: The graph includes all male practitioners with premiums of at least $1,500 from all MIIs.

A.4.21 The model does not impose an assumed pattern of ‘winding down of risky practice’ with age. Reduction in claim risk is accounted for in the model to the extent that it is reflected in diminishing premiums.

Claim size assumptions

A.4.22 Claim sizes were assumed to increase with the delay to notification, on the basis that claims which take longer to report tend to be bigger on average for example, cerebral palsy cases.

A.4.23 The assumed claim reporting pattern is shown in Table 10 below. Claim sizes presented in the table do not include allowance for inflation or superimposed inflation. Adjustment for inflation and superimposed inflation is discussed below.

A.4.24 The claim reporting pattern is based on the reporting patterns provided by the approved actuaries of two of the MIIs.

Table 10: Claim reporting and size pattern

Development year Proportion of number of claims notified (per cent) Gross average claim size
($’000)(a)
1 19.8 70
2 20.3 80
3 13.4 80
4 18.8 100
5 9.0 150
6 5.4 150
7 2.9 150
8 2.4 150
9 1.7 150
10 1.8 150
11 1.4 150
12 1.1 150
13 0.8 150
14 0.4 400
15 0.2 400
16 0.1 400
17 0.1 400
18 0.1 400
19 0.1 400
20 0.2 400

(a) Gross average claim sizes presented in the table are intended to be in 2006 dollars and do not include allowance for inflation and superimposed inflation.

A.4.25 Claims cost net of high cost claim indemnities is calculated assuming that the HCCS threshold will change such that a constant proportion of the gross average claim size will be met by the HCCS. Thus, for simplicity, the HCCS threshold is assumed to increase in line with claims inflation over time. The model effectively assumes that 24 per cent of the total discounted claims cost will be met by the HCCS and 27 per cent of the ROC discounted claims cost will be met by the HCCS.

A.4.26 The projected ROC claims cost is very sensitive to the proportion of claims which are assumed to be reported late. The longer the delay between the incident and the claim, the greater the likelihood that a practitioner will be eligible for the Scheme at the time the claim is notified. Thus, a small change in the assumed proportion of late reported claims can have a significant impact on the estimated ROC claims cost.

Probability of a claim falling under the Run-Off Cover Scheme

A.4.27 The model involved projection of the proportion of the total accrual of liabilities which falls under the Scheme.

A.4.28 A practitioner can become eligible for the Scheme by reason of:

  • retirement at 65 years and older;
  • permanent disability;
  • death;
  • maternity;
  • resignation; or
  • satisfaction of other eligibility criteria specified in the regulations.

A.4.29 The probability of becoming eligible for the Scheme was estimated for each practitioner based on their age as at 30 June 2006 and their sex. Note that practitioners do not become eligible by means of resignation until three years have passed since cessation of practice.

A.4.30 The estimated likelihood of practitioners becoming eligible for the Scheme was overlaid on the projected claim notifications to give the projected ROC claim notifications for each practitioner. The expected notified claims cost was multiplied by the likelihood of eligibility in each future year, and summed across all practitioners to arrive at the expected cost of ROC claims notified in that year.

A.4.31 In other words, the total ROC claim notifications were calculated as the scalar product of the vector of claim notifications and the vector of probabilities of Scheme eligibility for each practising doctor in each future year.

A.4.32 It was assumed that on average practitioners who become eligible for the Scheme do so half-way through the financial year.

Demographic assumptions

A.4.33 The probabilities of death and disablement were assumed to be an increasing multiple of the probabilities of death in Australian Life Tables 2000-02 (ALT 2000-02). The probabilities of death were assumed to be 50 per cent of ALT 2000-02 until age 65 whereafter they were assumed to be 90 per cent of ALT 2000-02. The probabilities of permanent disability were assumed to be an increasing multiple of ALT 2000-02 from 20 to 40 per cent from age 25 to 64, and 0 from 64 onwards.

A.4.34 The assumed probabilities of maternity leave were derived assuming that female practitioners each have an average of 1.5 children between ages 28 and 43 and that they take one year of maternity leave for each child. The probabilities of alternative means of Scheme eligibility (particularly resignation and retirement) were inferred from the age distribution of practising doctors.

A.4.35 The probabilities of resignation were assumed to be 0.5 per cent between ages 39 and 51, increasing linearly to 1 per cent at age 56, increasing to 6 per cent at age 60, and increasing linearly to 10 per cent at age 64. The probabilities of retirement were assumed to be 13 per cent between ages 65 and 70, increasing linearly to 41 per cent at age 84. The probabilities of retirement were assumed to be 100 per cent for ages 85 and above, given the negligible effect on the results.

A.4.36 It is instructive to present the probabilities that a practising male doctor will be eligible for the Scheme in future years. The decrement assumptions are summarised in Table 11 in the form of assumed probabilities of being eligible for the Scheme at the end of each of the next 10 financial years for males.

Table 11: Assumed probabilities of eligibility for the Run-Off Cover Scheme over the next 10 financial years for male doctors

Year ending
30 June
Age at 30 June 2006
20 30 40 50 60 70 80
2007 0.0008 0.0009 0.0012 0.0026 0.0074 0.1510 0.3876
2008 0.0016 0.0017 0.0025 0.0054 0.0157 0.2982 0.6403
2009 0.0024 0.0026 0.0039 0.0086 0.0248 0.4356 0.7983
2010 0.0032 0.0035 0.0104 0.0169 0.0934 0.5590 0.8925
2011 0.0040 0.0045 0.0170 0.0256 0.1672 0.6656 0.9458
2012 0.0048 0.0054 0.0236 0.0355 0.3528 0.7543 1.0000
2013 0.0056 0.0064 0.0303 0.0466 0.5043 0.8254 1.0000
2014 0.0064 0.0074 0.0371 0.0590 0.6260 0.8801 1.0000
2015 0.0073 0.0085 0.0441 0.0726 0.6811 0.9206 1.0000
2016 0.0081 0.0097 0.0511 0.0875 0.7286 0.9494 1.0000

A.4.37 The model is very sensitive to the assumed resignation and retirement decrements and the calibration of these decrements is very important. The model is somewhat less sensitive to death and permanent disability decrements since resignation and retirement are assumed to be more likely means of eligibility. The model is not particularly sensitive to maternity decrements as doctors on maternity leave are only eligible for the Scheme for the period of leave which is assumed to be one year.

A.4.38 Figure 7 below depicts the number of practitioners projected to become eligible for the Scheme by various means during the 2006-07 financial year. Although doctors will become eligible for the Scheme during 2006-07 by way of cessation of practice (having ceased practice during 2003-04), the number below refers to doctors who will actually become eligible during 2009-10.

Figure 7: Projected entries to the Run-Off Cover Scheme based on decrement assumptions

Figure 7 (column chart): Projected entries to the Run-Off Cover Scheme based on decrement assumptions

A.4.39 The number of practitioners projected to enter the Scheme by reason of retirement and maternity leave were substantially higher than the number provided by the insurers for the 2004-05 and 2005-06 financial years (see Figure 2).

A.4.40 It is possible that the information provided by the MIIs under-represented the number of practitioners who became eligible for the Scheme during 2004-05 and 2005-06 by way of age retirement. Alternatively, the assumed retirement rates may be too high. The concept of retirement might be less clear-cut for a private medical practitioner than for, say, a general workforce employee. This point will require close scrutiny in future years, and also in the administration of the Scheme.

A.4.41 In the case of maternity leave, it may be that the information provided by the insurers under-represented the number of doctors taking maternity leave, that doctors have less children than the general population, or that doctors who become pregnant are less likely to take maternity leave for a complete premium year. However, the assumed probabilities of maternity leave have not been adjusted given that they do not have a major effect on the estimate of the accrual of Scheme liabilities during 2006-07.

A.4.42 Where the date of birth was not available for a practitioner, an age was assigned randomly according to the age distribution of all ‘at-risk’ doctors.

Payment patterns, inflation and discounting

A.4.43 ROC indemnity payments in relation to medical incidents occurring after 30 June 2006 were projected assuming the payment pattern in Table 12 below.

A.4.44 This payment pattern differs slightly from what was assumed last year. While last year’s assumed pattern was based on our broad understanding of typical experience, this current pattern is based more directly on payment patterns assumed by industry actuaries.

Table 12: Payment pattern assumed

Delay from notification to payment
(years)
Proportion of claim costs paid
(per cent)
1 3.15
2 15.41
3 20.10
4 19.53
5 10.07
6 8.73
7 6.78
8 5.45
9 4.02
10+ 6.74

Economic assumptions

A.4.45 Medical indemnity claim costs tend to increase at a faster rate than general inflation. Claim payments were projected to increase in line with wage inflation plus superimposed claim cost inflation.

  • Wage inflation was assumed to be 4 per cent per annum. This is not inconsistent with general expectations of wage growth.
  • Superimposed inflation was assumed to be 2.5 per cent per annum. Superimposed inflation refers to the tendency for medical indemnity claim amounts to increase at rates faster than general inflation. Bursts of superimposed inflation have been observed in the past. Despite this, superimposed inflation is typically allowed for with a constant assumption. For this exercise, an allowance of between 2 per cent and 5 per cent per annum might be reasonable. We have adopted an assumption towards the lower end of this range, having regard to the potential impact of the various tort reforms that have taken place over the last few years.

A.4.46 Claim payments were discounted at a rate of 6 per cent per annum. This is slightly higher than the rate that would have applied had we adopted precisely the same approach as last year. However, the chosen rate remains broadly consistent with the yield on Commonwealth bonds at 30 June 2006. Moreover, it provides consistency with the rate adopted in a number of similar contexts and therefore is suitable from a whole of government perspective.

Data summarising the cohort of ‘at-risk’ doctors

A.4.47 Table 13 summarises the age distribution of the cohort of ‘at-risk’ practitioners, with the total premium representing a proxy for risk of medical indemnity claims for each age group.

Table 13: Cohort of ‘at-risk’ doctors

Age at 30 June 2006 Number ‘at-risk’ Total premium ($’000) Proportion males
(per cent)
<30 48 174 60
30-34 1,131 4,698 53
35-39 3,679 30,731 65
40-44 5,339 52,400 67
45-49 6,089 56,998 69
50-54 5,760 53,166 72
55-59 4,789 47,186 80
60-64 3,590 37,926 85
65-69 2,008 18,627 90
70-74 887 5,616 92
75-79 468 2,256 94
80-84 168 718 95
>85 40 161 93
Total 33,996 310,655(a) 74

(a) Numbers may not add due to rounding.

Estimate of the projected accrual of new ROC liabilities during the 2006-07 financial year provided by the actuaries of the MIIs

A.4.48 An estimate of the projected accrual of ROC liabilities during the 2006-07 financial year was provided by each of the actuaries of the MIIs; these summed to $9.8 million. This is less than the estimate of $15.6 million (roughly 9 per cent of the estimated accruing claims cost for 2006-07) published in last year’s report, which was based on our model. Estimates provided by industry actuaries varied from 2 per cent to 8 per cent of estimated claims cost for individual insurers.

A.4.49 Industry estimates of Scheme accrual appear to be quite different from one another, varying from about 2 per cent to 8 per cent of total claims cost (Scheme accrual plus non-Scheme accrual). However, it is worth noting that these apparently very different estimates represent an assumed difference between non-Scheme claim accrual of about only 6 per cent. Thus, the high estimate of 8 per cent is consistent with an assumption that 92 per cent of the claims cost will fall outside of the Scheme while the low estimate of 2 per cent is consistent with an assumption that 98 per cent of the claims cost will fall outside of the Scheme.

Projection of future Run-Off Cover Scheme costs

A.4.50 Table 14 below summarises the next 10 years’ ROC indemnity payments which were aggregated to derive the projected Scheme costs in future years.

Table 14: Calculation of projected ROC indemnity payments

  Medical incidents pre 1 July 2006    

Year ending 30 June

Notified as at 30/6/2006 ($m) IBNR as at 30/6/2006 ($m) Total ($m) Medical incidents post 30/6/2006 Total
($m)(a)
Grand total
($m)
2007 1.2 0.5 1.7 0.0 1.7
2008 0.5 1.4 1.9 0.1 2.0
2009 0.5 2.7 3.2 0.3 3.5
2010 0.4 3.5 3.9 0.7 4.6
2011 0.4 4.0 4.4 1.7 6.1
2012 0.3 4.8 5.1 3.3 8.4
2013 0.2 5.4 5.7 5.4 11.0
2014 0.2 5.7 5.9 7.8 13.6
2015 0.1 5.4 5.5 10.4 15.9
2016 0.1 4.9 5.0 13.2 18.2

(a) Numbers presented in the 2004-05 report were incorrectly shown in discounted values. They also excluded claims handling expenses.

Note: The costs of notified and IBNR claims do not always sum to the total cost of medical incidents pre 
1 July 2006 due to rounding.

Uncertainty in relation to liability projections

A.4.51 The projected ROC indemnity payments summarised in Table 14 are subject to uncertainty which relates to:

  • data in relation to the claiming behaviour of eligible practitioners;
  • substantial random variation associated with medical incidents and the notification of claims from year to year;
  • calibration of the model claim size and claim frequency assumptions to the underlying claim process (medical indemnity liabilities are characterised by few claims associated with large random variation such that a wide range of results can be obtained with equal statistical validity);
  • the possibility that doctors approaching retirement might cut down on their practice hours and possibly engage in less ‘risky’ practice (for example, less surgery) to a greater extent than allowed for in the model;
  • sensitivity of the model to the proportion of late-reported claims;
  • sensitivity of the model to the decrement assumptions;
  • the possibility that not all Scheme eligible claims have been identified and that recoveries will be more diligently pursued later in the claim process; and
  • recent tort reforms in a number of jurisdictions with the possible effect of ‘bringing forward’ claims and distorting recent claim experience.

A.4.52 The information provided by the actuaries of the MIIs and MDOs relied on broadly similar valuation models. The range of assumptions adopted by industry actuaries reflects the substantial uncertainty involved in estimating liabilities of the Scheme.

A.4.53 It must be emphasised that different results can be obtained from different yet equally plausible models and assumptions. Again, this is a common issue with liabilities of this nature.

Model sensitivity to the proportion of late-reported claims

A.4.54 The projection of ROC indemnity payments is particularly sensitive to the proportion of late-reported claims assumed in the model.

A.4.55 By way of illustration, the reporting pattern in Table 10 assumes that the average delay between medical incident and notification of a claim/incident is 3.8 years, regardless of claim size. If the reporting pattern is shortened by 0.3 years, then the projected accrual of new medical indemnity liabilities reduces from $184.0 million to $175.5 million (a reduction of only 5 per cent). However, the Scheme liabilities during 2006-07 reduce from $16.6 million to $13.8 million (a reduction of 17 per cent).

 

Appendix 5: High cost claims

The High Cost Claims Scheme

A.5.1 The High Cost Claim Scheme (HCCS) is part of the broader package of Australian Government measures announced on 23 October 2002 that were designed to address problems with the medical indemnity insurance industry.

A.5.2 The HCCS is governed by Division 2 of Part 2 of the Medical Indemnity Act 2002. Under the HCCS, MIIs and MDOs are reimbursed for part of the costs of large claims notified to them on or after 1 January 2003.

A.5.3 The HCCS meets 50 per cent of the excess above the threshold (currently $300,000) of the cost of individual large claims, before the operation of the Run-Off Cover Scheme.

A.5.4 The HCCS threshold and the percentage used to calculate the amount of indemnity can be changed by way of regulation. The HCCS threshold has been changed by way of regulation as follows:

  • $2 million for claims notified between 1 January 2003 and 21 October 2003;
  • $0.5 million for claims notified between 22 October 2003 and 31 December 2003; and
  • $0.3 million for claims notified 1 January 2004 and later.10

A.5.5 For example, for a claim which costs $1 million notified on 1 April 2005, the HCCS will pick up:

50 per cent × ($1,000,000 - $300,000) = $350,000

Data collection

A.5.6 Medicare Australia collects data in relation to the HCCS, in addition to the Scheme data described in Section 3.

A.5.7 Data collected in relation to the HCCS include:

  • details of claims/incidents notified to MIIs and MDOs by 30 June 2006 which might lead to recoveries under the HCCS;
  • an estimate of that part of the cost of claims which were notified to MIIs and MDOs by 30 June 2006 which is expected to be recoverable under the HCCS; and
  • an estimate of that part of the future claims cost of medical incidents notified during the 2006-07 to 2009-2010 financial years which is expected to be recoverable under the HCCS.

Relevance of HCCS data to the Run-Off Cover Scheme

A.5.8 A small proportion of medical indemnity claims are larger than $300,000. These high-cost claims have a noticeable influence on the total cost of medical indemnity each year.

A.5.9 Claims which take longer to report tend to be bigger on average. In addition, the longer the delay involved in notifying a claim, the more likely the claim will be notified at a time when the practitioner is eligible for the Scheme.

A.5.10 Thus, the small proportion of large claims made by retired practitioners will have a marked impact on the total cost of the Scheme.

Analysis of large claims

A.5.11 HCCS data collected by Medicare Australia provide some insight into the likely profile of large medical indemnity claims.

A.5.12 According to the data collected, as at 30 June 2006, 184 claims/incidents had been notified to MIIs and MDOs which were expected to be covered by the HCCS.

A.5.13 The cost estimates available for HCCS claims/incidents represent total case estimates, including amounts already paid as at 30 June 2006. Most of the estimated total cost of claims of $198.2 million is attributable to estimates of outstanding cost provided by claims managers, with only $18.8 million having already been paid as at 30 June 2006.

A.5.14 The HCCS data provides a reasonable but imprecise measure of the likely profile of large medical indemnity claims.

A.5.15 The distribution of estimated costs of HCCS-eligible claims notified by 30 June 2006 is shown in Table 15. The distribution is presented in terms of the proportion of total estimated claim cost attributable to each claim size band. For example, about one quarter of the total estimated cost of HCCS-eligible claims was attributable to claims expected to cost between $0.3 million and $0.5 million.

Table 15: Distribution of HCCS-eligible claims

Claim size
($’m)
Proportion of claims cost
(per cent)
0 to 0.3 N/A
0.3 to 0.5 23
0.5 to 2.0 45
>2.0 33

A.5.16 The HCCS data illustrates the pattern of delay between a relevant negligent medical incident and the date that a large claim/incident is notified to the MII or MDO. The claim reporting pattern observed in relation to HCCS claims is compared to the claim reporting pattern assumed for the Scheme in Figure 8. Note that all HCCS claims/incidents are included for the purposes of this analysis, regardless of the applicable HCCS threshold.

Figure 8: HCCS claim reporting pattern

Figure 8 (column chart): HCCS claim reporting pattern


7 Including the legal representative of a deceased doctor.

8 Since the time of the previous report, the Medical Indemnity Act has been amended to remove the requirement to have had insurance at the time of the incident.

9 Collected from the MIIs and MDOs by Medicare Australia for the purpose of the 2004-05 report.

10 Since the Run-Off Cover Scheme commenced on 1 July 2004, the relevant HCCS threshold is currently $300,000.

 

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